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5 September 2025
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September 5, 2025
Recent coverage has reignited the debate around whether defence companies have a place in sustainable portfolios. With defence budgets rising across Europe and beyond, sustainable investors are being asked to decide where they draw the line, and why.
What Counts as “Sustainable” in Defence?
As exposure to defence within ESG-labelled funds continues to grow, the debate centres on whether defence can be framed as compatible with ESG at all, and if so, on what terms. Some asset managers argue that defence allocations can be justified under the “social” pillar if they support the protection of citizens and national security. Others, such as Triodos Asset Management, argue that weapons by their very nature cause harm and therefore can never be aligned with sustainability goals.
The European Commission has recently weighed in on this discussion through its ReArm Europe/Readiness 2030 initiative to bolster the bloc’s defence capabilities. The programme frames investment in security infrastructure as consistent with UN Sustainable Development Goal 16, which calls for Peace, Justice, and Strong institutions. Supporters suggest this provides ESG funds with a rationale for limited exposure to the sector.
But this framing has sparked concerns over “peace-washing.” Critics warn that labelling defence spending as ESG-aligned risks diluting the credibility of sustainable finance. Even if regulators permit such exposure, investors remain uneasy about reputational risks and client perceptions.
Regulators Weigh In
Regulators have so far taken a permissive stance. The UK’s Financial Conduct Authority has confirmed that its sustainability disclosure rules do not prohibit investment in defence. France’s Autorité des Marchés Financiers has echoed this message, stressing that European standards should not create “undue obstacles” to defence finance. At EU level, the Commission has gone further, aligning its sustainable finance rulebook with its ReArm Europe plan.
Yet ambiguity persists when it comes to Article 8 and 9 funds under Sustainable Finance Disclosure Regulation, or funds seeking a “sustainable” label under the UK’s new framework. Controversial weapons remain a red line, but nuclear weapons, dual-use goods, and conventional arms remain subject to investor interpretation.
Performance and Exposure
Fund data illustrates the shifting picture. According to Commerzbank, underweights in aerospace and defence have been a major driver of ESG underperformance since 2022. Exposure to the sector within European sustainable funds has nonetheless crept upwards: from just 0.26% before the invasion of Ukraine to 0.72% in early 2025. Airbus, Safran, Thales and MTU Aero Engines are among the most frequently held stocks.
Where This Leaves Investors
As our own July briefing “Beyond the Defence Headlines: Is ESG the Problem?” highlighted, the real issue is not prohibition but disclosure. ESG rules do not prevent defence investment, they require investors to explain how such exposure fits into a sustainable strategy. The legal red lines remain narrow: cluster munitions and anti-personnel landmines are banned; nuclear weapons sit in a regulatory grey zone.
The challenge is reputational as much as regulatory. For some asset managers, investing in defence is consistent with fiduciary duty. For others, it risks alienating clients or undermining credibility. And yet, with recent attribution studies showing that portfolios underweighting defence have significantly underperformed since 2022, another question arises: can “sustainable” funds afford to avoid the sector entirely? Should they sacrifice performance to maintain exclusions, or risk stretching the meaning of sustainability to deliver stronger returns?
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Jack Grogan-Fenn
Jack Grogan-Fenn
Jack Grogan-Fenn
